CF Industries Holdings Inc (NYSE:CF), a large-cap worth US$10.55b, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of CF Industries Holdings’s financial liquidity and leverage to give you an idea of CF Industries Holdings’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CF here. See our latest analysis for CF Industries Holdings
Does CF produce enough cash relative to debt?
CF has shrunken its total debt levels in the last twelve months, from US$5.78b to US$4.69b , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$835.00m , ready to deploy into the business. Moreover, CF has produced cash from operations of US$1.63b over the same time period, leading to an operating cash to total debt ratio of 34.76%, meaning that CF’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CF’s case, it is able to generate 0.35x cash from its debt capital.
Can CF meet its short-term obligations with the cash in hand?
Looking at CF’s most recent US$580.00m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.53x. For Chemicals companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is CF’s debt level acceptable?
With debt reaching 70.41% of equity, CF may be thought of as relatively highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times CF’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For CF, the ratio of 1.14x suggests that interest is not strongly covered. Given the sheer size of CF Industries Holdings, it’s unlikely to default on interest payments and enter bankruptcy. However, compared to an amply profitable large-cap peer, debtors may see more risk in lending to CF.
Although CF’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around CF’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for CF’s financial health. Other important fundamentals need to be considered alongside. You should continue to research CF Industries Holdings to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CF’s future growth? Take a look at our free research report of analyst consensus for CF’s outlook.
- Valuation: What is CF worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CF is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.